Wednesday, December 2, 2015

Congress Needs to Support Business Owners - Who Are Often At Risk in Excessive Fee Litigation

I increasingly wonder why Republicans in Congress - long seen as the protectors of business owners both large and small - are largely against the DOL's attempt to update its rules. Especially since these rules substantially benefit business owners, both large and small.

What Congress does not realize is the current exposure of plan sponsors - i.e., BUSINESSES LARGE AND SMALL - to excessive fee litigation. Several cases have worked there way through the courts. More than a dozen large cases have been settled. And many more are pending. This liability exposure for business owners results from plan sponsor's reliance upon non-fiduciary "retirement plan consultants."

In essence, these "consultants" - many of whom are associated with Wall Street firms and insurance companies - advise plan sponsors to fill up the fund choices with high-priced offerings. Why? Because the consultants make more money - either from their proprietary funds that become part of the menu of plans, or from compensation received from fund providers.

Yet, these consultants are able to hide behind the shield of "suitability" and not be liable for the recommendations they have made. This is because the outdated suitability doctrine is actually a substantial lessening of the duty of due care virtually every other provider of services in America must adhere to. Originally designed to protect brokers and dealers for liability resulting from executing stock and bond trades, by lowering the duty of care, the suitability doctrine was inexplicably extended (by the SEC) to the selection of investment managers (i.e., mutual funds) in the mid-1970's - a decision that has cost our fellow Americans hundreds of billions of dollars in lost retirement savings over the past several decades.

And, under current DOL rules (adopted before the commencement of 401k plans and IRAs), since the consultant is often not a fiduciary, the consultant usually escapes any liability - leaving the business owner to hold the bag.

This is part of the problem the DOL's proposed Conflict of Interest Rule is designed to stop. It updates the definition of fiduciary to extend to virtually all providers of investment advice. In so doing, those who provide investment advice to business owners, such as consultants to 401(k) plans, will be held liable for any bad recommendations. The plan sponsor (business) will no longer be solely liable, and without any recourse against the consultant for the investment advice which was provided and received. And ... this seems only fair.

Of course, no one can stop Wall Street and the insurance companies from harming their own employees. Fortunately, in the instance below, the insurance company / broker-dealer was a fiduciary, as the plan sponsor - and could not escape potential liability for recommending high-cost products that served to undermine its own employees' retirement security, because of higher fees.

Another Excessive Fee Suit SettledNAPA.NET - 11/30/15"A federal district court judge has approved what plaintiffs’ attorneys have called an $11 million settlement in another so-called excessive fees case, though the actual cash outlay will be significantly less.Under the terms of the settlement of the class action lawsuit, approved by U.S. District Judge John Jarvey, Principal has agreed to pay $3 million into a settlement fund (which also includes payment for attorneys’ fees), as well as agreeing to reduce plan fees going forward by at least $8.1 million. Pensions & Investments reports that Principal will reduce administrative expenses of the plans to seven basis points from 14 basis points, and has also agreed to add a self-directed brokerage window to its defined contribution plans. Participants will also be able to invest in non-Principal funds.The class action lawsuit claimed that employees of Principal only had the option of investing in Principal-branded funds for their company-sponsored retirement plans, “whereby the plans paid, directly or indirectly, higher than reasonable fees.” The participants alleged that the retirement plans used Principal investments and administrative services “because Principal, its subsidiaries and its officers benefited financially from the fees,” according to P&I, citing court documents...Principal denied wrongdoing, according to the settlement agreement. “The company states that it is entering into the agreement solely to eliminate the burden and expense of further litigation,” the agreement document said, according to the report by P&I."

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Ron A. Rhoades, JD, CFP® sailed across the Atlantic on a tall ship, performed in theme parks and road shows in Europe and America as a Disney character, rowed on a championship crew team, marched in the Macy’s Thanksgiving Day Parade, marched in competition with a state-champion rifle drill team, undertook a solo one-week trip into the Everglades, escorted numerous celebrities around Central Florida, performed as a “Tin Man” at a mountaintop theme park called “The Land of Oz” in Beech Mountain, NC, and served as a stage manager and talent scheduling coordinator for entertainment productions at Walt Disney World. And then he graduated college.

Since then, Ron Rhoades earned his Juris Doctor degree, with honors, from the University of Florida College of Law, which was preceded by a B.S.B.A. from Florida Southern College. Ron Rhoades has 30 years of experience as an attorney, with nearly all of those years substantially devoted to estate planning, tax planning, and retirement plan distribution planning. Ron also has over 15 years as a personal financial adviser. He was a principal with an investment advisory firm where he served as its Director of Research and Chair of its Investment Committee.

The author of numerous articles published in financial industry publications and several books, Dr. Rhoades has been quoted in numerous consumer and trade publications, and has been interviewed on Bloomberg's "Masters in Business" radio show segment. He writes occasional articles for industry publications. Ron is a frequent speaker at local FPA chapter meetings and national conferences in the financial planning and investment advisory professions.

Ron Rhoades was the recipient of The Tamar Frankel Fiduciary of the Year Award for 2011, from The Committee for the Fiduciary Standard, as he “altered the course of the fiduciary discussion in Washington.” He was also named as one of the Top 25 Most Influential persons associated with the investment advisory profession in 2011 by Investment Advisor magazine, and was voted to the “Sweet 16 Most Influential” in Wealth Management’s 2013 “March Madness” competition. Dr. Rhoades was also named as one of the "Top 30 Most Influential" members in NAPFA's 30-year history in 2013. This blog was also called one of the "Top 25 Most Dangerous" in financial services.

Ron A. Rhoades, JD, CFP® became Program Director for the Financial Planning Program (B.S. Finance, Financial Planning Track) at Western Kentucky University's Gordon Ford School of Business in July 2015. He provides instruction to highly motivated, exceptional undergraduates students in such courses as Applied Investments, Retirement Planning, Estate Planning, and the Personal Financial Planning Capstone course. He has previously taught courses in Insurance & Risk Management, Employee Benefits, Money & Banking, Advanced Investments, and Business Law I and II.

Ron also serves on the Steering Committee of The Committee for the Fiduciary Standard, on whose behalf he frequently travels to Washington, D.C. to meet with policy makers in Congress and in government agencies regarding the application of the fiduciary standard to personalized investment advice.